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Fundamentals of Management Accounting · Class 12 Commerce

Ch 3Ratio Analysis — Class 12 Fundamentals of Management Accounting, concept-first.

Ratio Analysis is a tool of financial-statement analysis in which the relationship between two related figures, drawn from a business's Balance Sheet or Statement of Profit and Loss, is expressed as a ratio (e.g. 2 : 1), a percentage (e.g. 30%), or a number of times (e.g. 8 times).

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Meaning, Utility, Significance, Limitations and Classification of Ratios

Ratio Analysis expresses the relationship between two related financial-statement figures as a ratio, percentage, or number of times, so a firm's liquidity, efficiency, and profitability can be read quickly and compared…

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Meaning, Utility, Significance, Limitations and Classification of Ratios

Ratio Analysis is a tool of financial-statement analysis in which the relationship between two related figures, drawn from a business's Balance Sheet or Statement of Profit and Loss, is expressed as a…

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Liquidity Ratios

Liquidity Ratios measure a firm's ability to meet its short-term (current) obligations as they fall due, using its current assets.

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Activity (Turnover) Ratios

Activity (Turnover) Ratios measure how efficiently a firm uses its assets — inventory, debtors, creditors, and working capital — to generate sales.

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Profitability Ratios

Profitability Ratios measure a firm's overall earning capacity — both as a margin on sales and as a return on the capital invested to earn those sales.

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Questions for Practice

These questions test your understanding of the meaning, utility, significance, limitations, and classification of ratios, and the calculation of liquidity, activity/turnover, and profitability ratios…

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  1. Q1What is meant by Ratio Analysis? State its utility (usefulness) to any three users of accounting information.Free
  2. Q2State any four points of significance (advantages) of Ratio Analysis.Free
  3. Q3Explain any four limitations of Ratio Analysis.Free
  4. Q4How are accounting ratios classified? Explain each category briefly.Preview
  5. Q5From the illustrative data in Section 1 (Current Assets ₹5,00,000, comprising Inventory ₹2,00,000, Trade Receivables ₹1,50,000, Marketable S…Preview
  6. Q6From the illustrative data in Section 1 (Cash and Bank ₹80,000, Marketable Securities ₹20,000; Current Liabilities ₹2,00,000), calculate the…Preview
  7. Q7What is the significance of the Current Ratio, and why is 2 : 1 conventionally considered ideal?Preview
  8. Q8From the illustrative data in Section 1 (Cost of Revenue from Operations ₹14,00,000; Opening Inventory ₹1,50,000; Closing Inventory ₹2,00,00…Preview
  9. Q9From the illustrative data in Section 1 (Net Credit Sales ₹18,00,000; Average Trade Receivables ₹1,50,000), calculate the Debtor Turnover Ra…Preview
  10. Q10From the illustrative data in Section 1 (Net Credit Purchases ₹12,00,000, Average Trade Payables ₹1,50,000; Revenue from Operations ₹20,00,0…Preview
  11. Q11From the illustrative Statement of Profit and Loss in Section 1 (Revenue from Operations ₹20,00,000; Gross Profit ₹6,00,000; Net Profit afte…Preview
  12. Q12From the illustrative data in Section 1 (Net Profit after Tax ₹2,70,000; Shareholders' Funds ₹8,00,000; Net Profit before Interest and Tax ₹…Preview
  13. Q13Distinguish between Gross Profit Ratio and Net Profit Ratio, and briefly explain the significance of Return on Capital Employed.Preview